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PowerPoint Slideshow about 'International Finance' - herschel

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Exchange rate risk is the chance of gain or loss from exchange rate movements that occur during a transaction

Q: An American company orders 500 sweaters on 9/07/01 from a German company at a cost of 55,000 marks with terms of n/60. The exchange rate at that time was $0.4579 U.S. per mark. Calculate the gain or loss on the transaction if the bill was not paid until 11/7/01, when the exchange rate was $0.4581 U.S. per mark.

A:If the bill had been paid on 9/07/01 at the then current exchange rate, the cost would have been $25,184.5, or 55,000 marks  0.4579. However, if the bill was not paid until 11/7/01 at the then current exchange rate, the price would have been $25,195.5, or 55,000 marks  0.4579. Thus, an $11 loss would have resulted due to the slight shift in exchange rates over the two months.

If the rate goes against the firm (the foreign currency strengthens—$1 U.S. will buy fewer foreign currency or 1 unit of foreign currency will buy more U.S.dollars) the profitability will decrease and vice versa